Greed is still not the problem

Wrote this 7 years ago today, and it's still relevant. Actually I believe Hillary made some comment during the debate that the subprime mortgage crisis was caused by greed.

Greed was a part of it in the sense that it is a part of everything, but we can't fall for this rhetoric designed to divide people.

Instead, let's look at what led up to the crisis. The government decided that home ownership is a good thing, and created various incentives to own a home (like tax breaks). At the same time, they created incentives for banks to lend more, especially to lower-credit families (for example, quotas). This created a bubble--more people were buying than really could afford it, and more loans were available than was really prudent.

At the same time, the banks were taking on more risk than they really wanted to with these subprime mortgages, so they devised a way to spread the risk around, by bundling the mortgages together in a pool and then selling off little bits of them. Kind of like insurance--a single person is risky, but when you have a bunch of people paying in, they balance each other out. The problem was, doing this with loans was a new thing, and people didn't know how to accurately price and measure the risk--so firms loaded up on these instruments thinking the risk was much lower than what it was.

Meanwhile, in order to be able to offer these subprime mortgages at a cost the borrowers could afford, they offered variable rate mortgages starting with a low rate. Some call this predatory lending. I think the banks were caught between the government wanting more subprime lending, and good business principles saying they need to charge a higher interest rate for higher risk loans.

So when the interest rates started resetting to much higher rates, big surprise, many of the families couldn't pay. So they defaulted, and large percentages of these "pools" became worthless.

ANYWAY, long story short, yeah greed played a role in that. People trying to buy more than they can afford is greedy. Banks making money off of people so they can keep their doors open is greedy. And politicians wanted to be reelected and feel good that they did something "for the people" is also greedy.

But notice that without that last component, this wouldn't have happened. Banks would have been greedy enough to reject the lower credit borrower, or offer them a higher interest rate to offset the risk. People would have been greedy enough to reject the higher interest rate and rent a few more years, or get a smaller place and borrow less. Yes, fewer people would have bought homes, and more would have had to come to terms with the fact they simply couldn't afford the house they wanted yet (which I think is better than buying it only to be kicked out when you default), but there would have been no bubble, no bailouts, and possibly no recession.

So I say, the next time the government offers to help us cut corners and do things the easy way, our response should be "no thanks"